How do Analysts Arrive at this Conclusion?

H

hcour

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I'm trying to understand some of the fundamentals in the FX market. In my research on the GBP I recently read the following analysis (on TradingEducation.com) that was posted on May 17th of this year:

Markets are pricing in two rate increases by year end...

Forgive my naivete, but how do they determine this? Is this an informed opinion, or are they looking at specific data that makes this a fact? And if the latter, what data is used to determine this?

Thanks for any input,
H
 
It is a fact.

There are Fed Fund futures (?) - essentially contracts on very short-term notes (?) or interest rates whose return is closely tied to fed rates. The curve of these futures contracts reflects market concensus expectations of Fed rates going forward.

How to actually do this may be academic, but certainly no secret. If you go to CBOT website I would think you could find a paper on it.

*That is just my rough understanding - if someone wants to correct or be more precise, have at it. I certainly don't go calculating this in my spare time.

For our purposes, typically when financial press says 'markets pricing in two hikes' this is based on futures prices and can be taken at face value. The Fed actually looks at these 'expectations' and callibrates its rhetoric in order to 'manage' expectations accordingly.
 
Quote from hcour:

I'm trying to understand some of the fundamentals in the FX market. In my research on the GBP I recently read the following analysis (on TradingEducation.com) that was posted on May 17th of this year:

Markets are pricing in two rate increases by year end...

Forgive my naivete, but how do they determine this? Is this an informed opinion, or are they looking at specific data that makes this a fact? And if the latter, what data is used to determine this?

Thanks for any input,
H
More...
current rate is 4.75... mkts are expecting 5.00 by sept expiry and pricing in another (25bp) hike after that - see attached

why am i sharing this u may ask yrself... because sadly if it ever was meaningfully correlated to any intraday or even daily GBPUSD or GBPXXX price moves, it no longer is... no need to thk me ;-)
 

Attachments

There are approximately 4 houses in the entire world. Maybe 3. One indivdual thinks this way and communicates his opinion. Everyone agrees so as not to look foolish or get fired. This opinion is handed out to all the world and everyone writes there own version cause this person must know what they are talking about. Hogwash. Plain and simple unadulterated,(should not be listened to by anyone who wants to increase their personal wealth), hogwash.

WHat the heck is hogwash anyway?
 
Thanks for the replies, guys.

Wallace, it was the GBP, so that'd be the UK increase he was speaking of.

H
 
I was listening to CNBC Europe on: http://astream.net/live/cnbc/cnbc2.asx (switches to US) just before the previous BoE announcement and one of the guest analysts was very sure there'd be an increase, as there was: http://news.bbc.co.uk/1/hi/business/5241974.stm

Look at the ZEW table I posted in Economy and note how all the US #s have dropped while Euro/UK are rising (excepting the Germany ZEW). The ECB unlike the UK/US (announcing on the 31st) do pre-announce a rise due to the number of countries involved in the EU, and are said to be on an every-2-months increase.

In answer to your question I'd say it's "informed opinion", and 'specific data', same as the BoE looks at, inflation related, read: http://www.invbiznews.com/wordpress/?p=428

Note that the GBPUSD can travel sideways for quite a time prior to rate and other important announcements, and there's 'buy rumour sell news' such as the previous 'ECB will raise 50 points'.
 
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